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Fund Manager Charged in $250 Million Insider Scheme

Reuters With CNBC.com
Tuesday, 20 Nov 2012 | 2:15 PM ET

A former hedge fund manager who worked for a wholly-owned division of Steven A. Cohen's SAC Capital was arrested on Tuesday in what U.S. prosecutors are calling "the most lucrative insider-trading scheme ever."

Bloomberg | Getty Images

Mathew Martoma, who worked for CR Intrinsic Investors in Stamford, a unit of SAC Capital, has been accused of making more than $276 million in illicit profits based on tips about Elan and Wyeth LLC, which was bought by Pfizer in late 2009.

Authorities contend Martoma and SAC Capital's CR Intrinsic made more than $276 million in illegal profits or avoided losses in July 2008 by trading ahead of a negative public announcement involving the clinical trial results for an Alzheimer's drug being jointly developed by Elan and Wyeth.

"As alleged, by cultivating and corrupting a doctor with access to secret drug data, Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time," Manhattan U.S. Attorney Preet Bharara said in a statement. "As Martoma allegedly got sneak peeks at drug data, he first recommended that the hedge fund build up a massive position in Elan and Wyeth stock, and then caused the fund to shed those shares after getting a secret look at the unexpectedly bad results of a clinical drug trial."

The charges against Martoma, who left the SAC Capital division in 2010, stem from the federal government's long-running investigation into improper trading in the $2 trillion hedge fund industry.

To date, the investigation has led to more than 50 convictions with the most notable ones being former Galleon founder Raj Rajaratnam and former Goldman Sachs Group director Rajat Gupta.

Slowly, U.S. authorities have been filing charges and winning convictions against lower-level traders and analysts who once worked for Cohen, one of the hedge fund industry's most successful and best-known traders.

Questions Surrounding SAC's Cohen
CNBC's Kate Kelly has the latest details on an ongoing investigation at SAC Capital Advisors.

Martoma's lawyer, Charles Stillman, said his client was an "exceptional portfolio manager" and he is confident that Martoma will be exonerated.

A spokesman for SAC Capital and Cohen, who was not charged, said he was not immediately prepared to comment.

The criminal complaint filed by federal prosecutors and a related civil lawsuit filed by the U.S. Securities and Exchange Commission contend Martoma got insider information from a doctor, who once worked as a consultant for a so-called expert network. Hedge firms use such networks to gain insight into various industries.

According to court papers filed on Tuesday, Martoma spoke in July 2008 to the "hedge fund owner" and recommended selling shares of Elan and Wyeth before drug trial results were announced.

"The hedge fund owner and Martoma instructed the hedge fund owner's senior trader to begin selling the Elan position and to do so in a way so as to not alert anyone else, inside or outside of the hedge fund," the court papers stated.

The court filings do not identify the hedge fund owner, but CR Intrinsic is part of SAC Capital, which is a $14 billion hedge fund controlled by Cohen.

The court papers do not indicate that Cohen had any knowledge of how Martoma obtained the information. They do indicate that the doctor is serving as a confidential cooperating witness in the case.

The charges against Martoma are the latest in a string of insider trading allegations to be leveled against former top traders and analysts who worked at the Stamford, Connecticut-based SAC Capital.

A person familiar with SAC Capital said that Martoma, an alumnus of the Stanford Graduate School of Business in California, sat near Cohen at SAC Capital's large trading floor in Stamford, Connecticut.

Martoma is the fifth former SAC Capital employee to be accused of insider trading in the last few years.

Two former traders, Noah Freeman and Donald Longueuil, pleaded guilty to insider trading charges last year. Jon Horvath, a former analyst at a division of SAC pleaded guilty to insider trading charges in September.

Another former SAC Capital employee, Jonathan Hollander, settled civil charges of insider trading last year with the SEC.

The SEC complaint identified the doctor who provided inside information to Martoma as Dr. Sidney Gilman, an 80-year-old Michigan resident, who also served as a consultant for Elan and Wyeth. Prosecutors did not disclose Gilman's name, but said the doctor is cooperating with the investigation.

Gilman's lawyer declined to comment.

Martoma was arrested on Tuesday morning in Boca Raton, Florida, according to an Federal Bureau of Investigation spokesman.

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